Yesterday’s Prediction is Today’s Lesson is Tomorrow’s Action

In January of this year, I made a series of rare predictions as we are in the manage money for the long term business, not the make short term predictions business. For full disclosure purposes, while the predictions were (and still are) intended to be long term in nature, my sense was that they would begin to unfold in 2016 as part of a longer term trend. How did these prognostications work out?

  • I noted that stocks would experience several material declines and end fairly quickly. This occurred in Jan/Feb, again around the BREXIT vote in June/July, and finally just prior to the US election. In all cases short-term declines reversed quickly as predicted. We did manage to avoid a full-fledged bear market (although many individual stocks, even large caps, declined 20%+ earlier in the year), but 2017 is another year…. Lesson Learned: Stock market declines can come and go rapidly. Be prepared financially and emotionally for such volatility and have a plan in place (preferably taking no action for long term money) so that you are not reacting to headline news based on emotions in the moment.

  • I suggested that value/dividend paying stocks would start outperforming growth stocks. This occurred with a vengeance in 2016. Through December 14th, the S&P 500 Value ETF (SPYV) is up 18.01% YTD vs. its Growth counterpart (SPYG) which is up 7.67%. Lesson learned: quality dividend paying stocks, even if out of favor for a period of time (e.g. late 1990s, 2013 – 2015) are still a valuable core port of any equity portfolio and I believe dividends will play an even more important role in returns over the next 5 – 10 years.

  • I stated that there would be days when large drops occurred and investors with stop losses in place would sell stocks on weakness, only to see the stocks rebound quickly. This occurred en masse in 2016. Lesson learned: Arbitrary stop losses are rarely a good idea. There are myriad cases in recent years where otherwise high quality blue chip companies such as GE, PG and others declined 30% or more in a matter of days or even hours, only to recover all those losses and then some within a very short period of time. Match your asset classes with your time horizon (cash for near term, stocks for long term, selective bonds for medium term, etc.) and ignore short-term market swings along the way.

  • I predicted that many weak companies in the oil sector would go under but that the majors, those with strong financials and diversified operations, would fare fine – even raise dividends. Both companies I named, XOM and CVX indeed raised their dividends while weaker players slashed or even eliminated their payouts. Lesson learned: stick with the best of breed companies in a given industry.

  • I anticipated that many international stocks, especially emerging markets, would outperform US stocks. This turned out to especially be the case prior to the US election. The post-election strengthening of the dollar and surge in US stocks narrowed the gap, but the outperformance remains with dividend paying emerging market stocks returning over 800 basis points higher than US stocks year to date. Lesson learned: Just as growth stocks outperformed value stocks by dramatic amounts in the late 1990’s, only to reverse course for the next decade, there continues to be an important place in one’s portfolio for international and related securities trading at a discount to US stocks.

  • As written in July just as interest rates hit all-time lows, I noted risks associated with bond ownership throughout the world - and that losses which would invariably occur as interest rates rose would make the NASDAQ bubble of 1999/2000 look tame in comparison. Within weeks of the US election, interest rates skyrocketed, causing trillions of dollars in losses for what many investors thought were ‘safe’ investments. Lesson learned: know the risks associated with what you own. No asset is risky or safe in and of itself; rather the price at which you buy it and your holding period can add or reduce risk. In this case, massive amounts of bonds were bought at historically high prices (as in 0%, or unprecedented, negative interest rates) – and in terms of time horizon, would owning a negative interest rate security likely become more valuable over time?!? It seems obvious now in retrospect – but actually was obvious at the time to those who understood how to value assets: those bonds were (and in many cases continue to be) highly risky with potential for material principal loss. When the music stops, the sands can shift very quickly as investors learned in the late 1990s when the NASDAQ went from 5,000 to under 2,000 in the blink of an eye, and again in the mid to late 2000s when many condo prices got slashed in half or more in a matter of months.

  • I made the argument that those who stick to a disciplined, well diversified investment program would do well and that those who panicked and sold into market weakness would suffer inferior results. This was an easy call. There were several occasions where this advice held true, with investors selling otherwise high quality companies in a panic in early 2016, midyear post BREXIT, and again going into the US election (with the DOW down over 2,000 points from its current level at one point pre-opening the day after polls closed). Lesson learned: no good financial decision was ever made in a moment of panic. Emotions are the enemy of smart investment decisions, so set forth a long-term plan during a period of calm and work with someone who can help you stick to it in a rational, disciplined way regardless of what the headlines read or where stocks are headed in the short run.

On a related note, with US stocks trading near all-time highs and stretched from a valuation standpoint, it is important to review your goals, time horizon, and portfolio construction. Part of being a disciplined investor is assessing areas where profits should be taken, where capital could be re-allocated to more attractive opportunities, where hedges could be effectively employed, etc. If you have the skills, time and discipline to do this yourself, great. If not, seek out a professional who can work with you on a one on one basis, understand your specific circumstances, and construct/modify a portfolio to be both consistent with your long term goals but also prudent given current market conditions.

Here’s to a great 2017!

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